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Tuesday, April 5, 2011

An increasingly hot topic in some circles as silver prices soar: Whether theSprott Physical Silver Trust, a silver closed-end fund better known as the PSLV [PSLV17.850.41(+2.35%)], should be worth more — bar for bar — than the iShares Silver Trust ETF, generally referred to as the SLV [SLV37.580.72(+1.95%)]?

Both claim to own the physical silver, but the PSLV trades at a nearly 20 percent premium to the value of the silver it holds, or its net asset value, while the SLV trades close the actual silver value.

Is the PSLV's silver higher quality? Is there some sort of silver shortage?

The answers: No and unlikely, though opinions vary on the latter.

Why, then, the disparity?

Again — lots of opinions, but an important one is the structure of a closed-end fund compared with an ETF: unlike the SLV, which redeems and creates shares daily to match demand, the PSLV only accepts redemptions on a monthly basis and buys more silver when it decides to do so. So far, it hasn't bought any silver since its original purchase last November. Any additional purchases would require a secondary offering.

But why would anybody pay a premium for that?

Again — lots of opinions, but according Sprott — it's worth the premium for three principal reasons:

—Any gains in the PSLV are taxed at 15 percent as a long-term capital gain if the fund is held for more than a year; that compares with 28 percent for ETFs. (There's a lot of fine print connected with this one, which you can read on Sprott's website, but its bottom line is that its closed-end fund is considered an investment; the ETF, a collectible.)

—Large holders can take physical delivery of their silver, with a minimum of ten 1,000-ounce bars.

—The silver is stored with the Royal Canadian Mint in Ottawa, which is a quasi government entity that presents no counter party risk.

That last point is a serious point of controversy. Some people think the SLV doesn't really own its silver; others don't think the PSLV owns its silver.

Assuming they both do own the silver they claim to own: Silver is silver. "I checked with two coin dealers and I could buy a million dollars in silver and pay a 2 percent commission — and one guy could get me the silver in five hours," says independent market analyst and trader Robert Sinn. "Sure, if you're buying $40,000 it might be harder, but paying a 20 percent premium is ridiculous."

That the PSLV commands such a premium, Sinn says, suggests the speculative exuberance around silver. "A billion dollar closed-end fund with a 20 percent premium makes no logic," he says.

My take: I was always taught to never buy a closed-end fund at a premium (certainly not a significant premium) to its net asset value. And a reminder, premiums come and go. The Sprott Physical Gold Trust also once traded at a 20 percent premium, too; it's now just 3.6 percent.